According to AARP's Survey of Consumer Finance, 54% of Baby Boomers do not want any risk associated with their investments. This aversion to risk is the primary reason why hybrid products, those offering a combination of upside potential while providing downside protection, have flourished over the last decade.
Financial planners often use a concept called “Capital Preservation.” A portion of the client's principal is invested with guaranteed fixed interest sufficient to grow back to the original principal at the end of the desired investment horizon. This guarantees that the client will get their principal at that time. The remainder is invested in equity markets, providing the potential for excess return. Unfortunately, with today's low interest rates, an investor needs to put almost all the money in fixed interest, leaving very little in stocks. For example, if a client has $100,000 to invest over a 4-year time horizon, and earns a 4-year guaranteed rate of 4%, then they must put $85,480 in fixed interest, leaving only $15,520 invested in equities. In other words, less than 16% of funds reflect equity market performance. As a result, the Capital Preservation concept is no longer workable in its traditional format.
Thus, there is a long-felt need for hybrid products, such as the Equity Indexed Annuity, with reduced complexity and increased benefits and flexibility.